Inflation in the U.K. is expected to have eased in October to 4.8% from 5.2%. Although consumer prices will be well beyond the BoE’ s 2% target and 3% threshold, oil prices dropping more than 60% from their all time high has erased price stability concerns.
Fundamental Outlook
Inflation in the U.K. is expected to have eased in October to 4.8% from 5.2%. Although consumer prices will be well beyond the BoE’ s 2% target and 3% threshold, oil prices dropping more than 60% from their all time high has erased price stability concerns. Indeed, the central bank slashed its outlook for inflation to well below the 2% target in their last quarterly inflation report as they were too optimistic about growth. Technical analysis is calling for a continuation of the current bearish decline with no sign of support until 1.4300. Easing price pressures will open the door for more rate cuts from the BoE, which should be a weighing factor for the Sterling. The Pound’s recent rally to test the 1.5000 price level presents a solid entry point for a short GBP/USD trade. The recent rally was based on increasing optimism that the U.K. government and policy officials will take all necessary measures to help prevent a deep recession. Nevertheless, the declining interest rate outlook combined with the deteriorating fundamentals of the economy will limit the upside potential for the cable.
Technical Outlook
Still confined to a steep channel, the British Pound remains bearish. There is no sign of a bottom, although channel support comes in just below 1.43 this week.
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To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com